Economic Freedom: Essential Principles

"[A] free economy is most suitable to a free polity."Ezra Solomon, "The Economy in a Free Society", The Free Society Papers, 1989

Introduction

A Migrant Mother and her Children during the Great Depression

Although there are no international covenants clearly guaranteeing economic freedom as there are with political and civil rights, few political theorists today doubt the connection between a free or market-based economy, broadly defined, and a free political system. In the late 18th and 19th centuries, political and economic liberalism were intertwined philosophies that heralded the expansion of both individual liberty and property ownership, the two characteristics that have generally marked the rise and success of democracies. Yet the strict interpretation of economic liberalism also became associated with economic license, large disparities in income, and catastrophes like the Great Depression of the 1930s. In Europe and the United States, social democratic parties responded by adopting more egalitarian policies and establishing components of a welfare state, even while generally accepting the basic foundations of a market economy. In the last 30 years, conservative parties in countries with major world economies (including the United States, the United Kingdom, Italy, and France) reintroduced classical economic liberalism as the guiding philosophy, but without eliminating the central institutions of the welfare state.

What in fact constitutes economic freedom? What degree of economic freedom is needed for democracy to flourish? Is it like freedom of speech, a principle that should be restricted only minimally in all cases, or is it more akin to the framework of representative government, with many equally effective variants existing side by side? The topic of essential principles is taken up again below, following a discussion of the history of economic freedom.

Essential Principles

Absolutist Principles and Smithian Economics

Economic freedom, like political freedom, has many definitions. As noted above, these are often tied to a political viewpoint or ideology. While Adam Smith's The Wealth of Nations wove the ideas of political and economic liberalism together, the most famous free-market theorists, such as Milton Friedman, Friedrich Hayek, and Ludwig von Mises, generally ignore Smith's broader theories and focus on his advocacy of laissez-faire, taking the principle of the free market as something like an absolute dictum. Thus, any state intervention in the economy—including such widely adopted policies as a minimum wage, environmental controls, or collective bargaining via labor unions—is considered to be a harmful infringement on economic freedom, even if Smith himself might have allowed it (Smith, for example, supported the right of workers to form unions). Hayek and Mises go so far as to say that any such intervention constitutes a step toward communism and tyrannical "serfdom."

The Heritage Foundation, a conservative think tank, conducts an annual survey of economic freedom that defines such freedom in stark terms:

The highest form of economic freedom provides an absolute right of property ownership, fully realized freedoms of movement for labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, individuals are free to work, produce, consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state.

This compelling statement, taken literally, appears to argue that any state action beyond basic functions like law and order violates economic freedom. Of course, while most democratic governments routinely violate the standard above, as well as the general concept of a completely free market, they still fall within the more complex definition of freedom used by Freedom House. Perhaps, then, some broader principles should be applied.

Common Principles

The 20th-century confrontation between democracy and Communist dictatorship points to the profound importance of both economic and political freedom. Under communism, state control over property and all aspects of the economy was not simply an alternative economic model but an essential component in a larger totalitarian system. The state's economic tyranny further reduced the realm of individual freedom and helped prevent the rise of an alternative to Communist political power.

Drawing on this experience and its contrast with democratic societies, economist Ezra Solomon, a former member of the U.S. president's Council of Economic Advisers, proposed a different way of thinking about economic freedom, reconnecting it to its political roots. In his essay "The Economy in a Free Society," he writes:

[A] free economy is most suitable to a free polity for it allows the broadest scope of liberty in the free exchange of goods and services between individuals and groups... Private property and free markets do limit the power of the state by diffusing its control over the economic lives of its citizens. Individual liberty in making economic decisions limits the power of the state to control the political lives of the citizenry.

Thus, property rights and individual freedom in economic decision making are a necessary bulwark against both the tyranny of the state and the economic power of privileged elites. To the extent that state intervention endangers that bulwark, it might be considered a violation of economic freedom. But if a lack of state involvement allowed the unhindered actions of privileged elites to threaten individual freedom, that too would violate the principles of economic freedom. Democracies have found that they must balance state intervention and economic freedom, and they have allowed voters to decide when that balance requires adjustment or correction.

...property rights and individual freedom in economic decision making are a necessary bulwark against both the tyranny of the state and the economic power of privilegedelites.

Conclusion

In the last 25 years, principles of economic freedom have generally advanced together with those of democracy and political freedom. In some cases economic liberalism followed the rise of political liberalism, while in others economic liberalism has spearheaded political change. In all countries, basic concepts of economic freedom as defined by Ezra Solomon above—lack of interference in individual decision making and the ability of free markets to diffuse state power—played a key role in political transitions. Another economic aspect of democratic transition was described by the renowned American sociologist Seymour Martin Lipset, who determined that economic development, modernization, and a rise in the middle class helped increase people's expectations for both economic improvement and political freedom (see Resources).

The connection between economic freedom and democracy is made clearer by a comparison of economic and political conditions. Of the 49 countries that received the top rankings in Freedom House's Freedom in the World 2007 survey (scores of 1 for both political rights and civil liberties), 40 were also listed in the United Nations Development Program's 2006 Human Development Index; 35 of those were among the index's top 50 countries. Similarly, 37 of the 49 were listed in the Heritage Foundation's 2007 Index of Economic Freedom, and 32 of those were ranked in the top 50. By contrast, lack of freedom and economic deprivation commonly go together. Although there are exceptions, the citizens of the world's worst dictatorships generally live in poor economic conditions.